brokerage windows

[Scuba 401]

do you think it is a plan sponsors responsibility or duty as fiduciary to monitor the reasonableness of fees and services for a brokerage window provider? 

now take it one step further, accounting and administrative issues aside, lets say the sponsor allows participants to do business with whatever broker they want to. do they still have the fiduciary duty to monitor the reasonableness of each broker chosen by participants and does it matter that it is the participants making the choice?

[MoJo]

1 hour ago, Scuba 401 said:

do you think it is a plan sponsors responsibility or duty as fiduciary to monitor the reasonableness of fees and services for a brokerage window provider? 

now take it one step further, accounting and administrative issues aside, lets say the sponsor allows participants to do business with whatever broker they want to. do they still have the fiduciary duty to monitor the reasonableness of each broker chosen by participants and does it matter that it is the participants making the choice?

Yes, (to the extent the plan sponsor is a fiduciary) on both counts.  I've seen no exception to the fiduciary rules that would allow a plan sponsor to punt on brokerage window fees.

Keep in mind that the assets belong to the trust - not the participant (who has a beneficial interest in those assets subject to certain conditions (vesting, distributeable events, etc.).  The plan fiduciaries have an obligation with respect to all of the assets of the trust - including those held in brokerage windows.

Now if you really want an interesting discussion, posit the question of whether or not plan fiduciaries have an obligation to monitor the investments held in those brokerage windows....

[BG5150]

About the only "pass" you get with the brokerage account is the fee disclosure and investment comparisons for 404(a)

[Scuba 401]

12 minutes ago, BG5150 said:

About the only "pass" you get with the brokerage account is the fee disclosure and investment comparisons for 404(a)

do you know of any clients of yours or anybody else that allows an open architecture brokerage (participants choice of broker) window?  the consultant i am talking to says quite a few smaller plans do this.    

[RatherBeGolfing]

Just now, Scuba 401 said:

do you know of any clients of yours or anybody else that allows an open architecture brokerage (participants choice of broker) window?  the consultant i am talking to says quite a few smaller plans do this.    

While you can allow participants to make that choice, you cannot pass on the responsibility of making sure that it is an appropriate choice with reasonable fees, etc.  

[BG5150]

I have several clients that either have a platform/SDB or SDB-only setups.

I do not have any clients that allow their participants to invest with any brokerage they want however.

[ESOP Guy]

1 hour ago, MoJo said:

No if you really want an interesting discussion, posit the question of whether or not plan fiduciaries have an obligation to monitor the investments held in those brokerage windows....

I know I have told the story before but I have been witness of this debate in real life.  A dental hygienist in 2008 put 100% of her money into Ford in what turned out to be near the bottom for Ford that year.  It turned out great for her but had she done it 12 months earlier in 2007 well....

The people I worked for convinced the dentist to set plan wide rules about not allowing too large of a concentration in a single stock, bond....  And part of the wealth management firm who was helping the dentist their contract included a provision to monitor this rule to not allow it to be violated. 

[MoJo]

8 minutes ago, ESOP Guy said:

I know I have told the story before but I have been witness of this debate in real life.  A dental hygienist in 2008 put 100% of her money into Ford in what turned out to be near the bottom for Ford that year.  It turned out great for her but had she done it 12 months earlier in 2007 well....

The people I worked for convinced the dentist to set plan wide rules about not allowing too large of a concentration in a single stock, bond....  And part of the wealth management firm who was helping the dentist their contract included a provision to monitor this rule to not allow it to be violated. 

We always hear the stories about the grand slam investment, but rarely do we hear the stories about the strikeouts (of which their are many, many more).

One might questions that if you have to put limits on investments in a brokerage window, is a brokerage window an appropriate mechanism for investment of plan assets?....

Food for thought....

[Kevin C]

We've only had a few plans over the years with brokerage accounts. We don't take plans with them any more.  The participants' brokerage account returns ranged from slightly worse than the designated alternatives to downright horrible. We didn't see any "winners". The all-time record was a partner at a law firm who had a 10-year annualized rate of return of -23%.  Over those 10 years, he managed to lose more than 92% of his balance.

[Scuba 401]

2 hours ago, RatherBeGolfing said:

While you can allow participants to make that choice, you cannot pass on the responsibility of making sure that it is an appropriate choice with reasonable fees, etc.  

seems like it would be an impossible task for the plan sponsor to constantly evaluate so many providers.  not that that should make a difference because they are the ones allowing this type of design. 

[ESOP Guy]

1 hour ago, MoJo said:

One might questions that if you have to put limits on investments in a brokerage window, is a brokerage window an appropriate mechanism for investment of plan assets?....

Food for thought....

I have had a 401(k) with a SDBA and it was during the 2008 and beyond time period.  It did allow me to put some non-traditional assets in my 401(k) account that helped to manage the size of the loss and did set me up for some nice gains coming out of the time period.

Not saying I got them all right- I didn't.

But by the summer is was convinced that there was a lot more downside left.  So I put a small amount of my assets in a ETF that gained when the market went down.  I also bought a number of preferred stocks and funds that invested in preferred stocks in the winter of 2008. 

Those asset classes are never going to be made a regular investment choice in a 401(k) plan and they helped minimize losses in 2008 and set my account up for a nice return coming out of it.  I suppose I could be said to be luck- so be it.  I don't claim to be right all the time but it is nice to have access to some outside of the box asset classes at times. 

So to me there is some value to SDBA but I fully acknowledge they can allow people to hurt themselves pretty bad. 

[RatherBeGolfing]

11 minutes ago, Scuba 401 said:

seems like it would be an impossible task for the plan sponsor to constantly evaluate so many providers.  not that that should make a difference because they are the ones allowing this type of design. 

In theory, yes.  Realistically, you won't end up with a different provider for each participant.  I have plans that will consider the participants choice, but the PA will still make the call on whether the provider is acceptable.  Those plans run between 40-100 participants and at most 10 different providers (which is still a PITA)

I will also note that while I work with plans like this I do not recommend them.  The are expensive, labor intensive, and full of potential issues. It is NOT an easy out for a sponsor who does not want to be troubled with 404a-5, duty to monitor, etc.  If anything, the duties and responsibilities increase exponentially.  

[MoJo]

44 minutes ago, ESOP Guy said:

I have had a 401(k) with a SDBA and it was during the 2008 and beyond time period.  It did allow me to put some non-traditional assets in my 401(k) account that helped to manage the size of the loss and did set me up for some nice gains coming out of the time period.

Not saying I got them all right- I didn't.

But by the summer is was convinced that there was a lot more downside left.  So I put a small amount of my assets in a ETF that gained when the market went down.  I also bought a number of preferred stocks and funds that invested in preferred stocks in the winter of 2008. 

Those asset classes are never going to be made a regular investment choice in a 401(k) plan and they helped minimize losses in 2008 and set my account up for a nice return coming out of it.  I suppose I could be said to be luck- so be it.  I don't claim to be right all the time but it is nice to have access to some outside of the box asset classes at times. 

So to me there is some value to SDBA but I fully acknowledge they can allow people to hurt themselves pretty bad. 

ESOP Guy:  I would suggest you are not the typical 401(k) participant....  Consider that a complement.  The "average" wouldn't have a clue about what you are talking about, and for every participant like you, I could point to dozens who misused the brokerage window trying to hit grand-slams at the expense of retirement security.

When I worked for Schwab, the largest holding in brokerage accounts in retirement plans was cash - about 30% - and that was at money market rates when the plan actually had a SVF paying 30 or 40 TIMES the rate on cash.  In addition, across the book of business, brokerage account participants UNDERPERFORMED non-brokerage account participants by 200 basis points (2%!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!)

[My 2 cents]

2 hours ago, Kevin C said:

We've only had a few plans over the years with brokerage accounts. We don't take plans with them any more.  The participants' brokerage account returns ranged from slightly worse than the designated alternatives to downright horrible. We didn't see any "winners". The all-time record was a partner at a law firm who had a 10-year annualized rate of return of -23%.  Over those 10 years, he managed to lose more than 92% of his balance.

To get that result, the partner must not have made an new contributions.  0.77 raised to the 10th power is, in fact somewhere between 0.07 and 0.08.  Putting new money in would surely have watered down the net loss (dollar cost averaging etc.). Is this partner to be found in the Guinness Book of World Records?